Thursday, October 1, 2015

Northwest FCU 3-year 3.04% Add-On CD

Today someone asked a question on the Bogleheads forum about saving for a house down payment in 3-5 years from now, so as part of answering the question, I checked the 3-year CD rates at DepositAccounts.com. I was flabbergasted to see a rate of 3.04% APY at the top of the list (with the closest competition at 1.85%). This is a promotional CD special ("Dream Fund Certificate") offered by Northwest Federal Credit Union (NWFCU), with a minimum deposit of $10,000 and maximum of $100,000. After finishing up my answer to the forum question, I quickly investigated the CD deal, then proceeded to complete the online application to join the credit union, open an account, and buy this CD. It took about 15 minutes.

This CD has a relatively unique feature, in that you can make additional deposits  to it at any time. This works out perfectly for me, because I have another CD maturing in a couple of weeks, so I was able to open the CD with some available cash, and will deposit more to it when my existing CD matures.

After reading the DepositAccounts.com blog post and comments about this CD deal, I went to the NWFCU web site, and read the disclosure document (clicking on the link downloads a PDF file with the disclosure); I was impressed that they had a link to the disclosure in the short paragraph describing the CD deal, since the disclosure document often is not easy to find, if available at all, on a bank or credit union web site.

The disclosure lays out the terms pretty clearly. One term of note is that they explicitly state that early withdrawals are allowed:

Transaction Limitations: Within the first 30 days that the certificate is open, the Credit Union will require 30 days’ notice of intent to withdraw funds as permitted in our Bylaws. You may otherwise make withdrawals subject to the early withdrawal penalties stated below.

The early withdrawal penalty (EWP) is 366 days of interest, which is larger than the 180 days of interest that I consider the current standard for a good CD, but with only a 3-year term and this exceptional rate, the EWP doesn't bother me. If you did an early withdrawal after two years, you'd earn about 1.5% per year, which is competitive with top-tier 2-year CDs.

One caution: some of the comments on the DepositAccounts.com blog post about this CD indicated that if the balance hits the maximum of $100,000, including reinvested interest, interest is no longer earned. That doesn't make sense to me, but unless verified otherwise, I would limit the maximum deposit to about $91,000, which will keep the value with reinvested interest under $100,000 at the end of three years.

UPDATE: Several Bogleheads have posted in the Bogleheads forum that NWFCU customer service reps have told them that you can deposit the full $100,000 and still earn interest. I was also informed of the same thing via a private message (PM) from a Boglehead. The misinformation in the previous paragraph seems to have been just a misunderstanding about the CD disclosure statements by someone who commented on the DepositAccounts.com blog post. The Boglehead who sent me the PM also said the service rep said that the $15,000 limit on the initial deposit could be overridden by instructing them in an email to transfer a larger amount, up to the maximum $100,000.

To get an idea of how good a CD rate is, I always compare it to the yield of a Treasury security of the same maturity. Currently the 3-year Treasury yield is 0.92%, so this CD rate is more than 2% (200 basis points) higher. For the CDs I've bought over the last five years, the average CD premium over Treasuries of the same maturities has been a little more than 100 basis points, and currently a good 5-year CD at 2.25% has a premium over a 5-year Treasury of about 90 basis points, so this is a fantastic deal.

I am buying this CD in a taxable account. I did not investigate whether or not this CD can be bought in an IRA, and whether or not NWFCU will lock the rate during the 2-3 weeks it typically takes to complete an IRA transfer. Doing an IRA transfer for a CD special can be risky if the bank or credit union won't guarantee the rate, since these promotional rates typically don't last long.

The membership application can be completed entirely online, and as mentioned, it only took me about 15 minutes to do so, including the time to enter the information for my beneficiaries (so this is a Payable on Death or POD account). Some documents to be signed electronically will be emailed. This is exactly the same process used by USAlliance Financial--the credit union I recently posted about joining to buy their 25-month CD special.

Based on what I read in the DepositAccounts.com blog post, I selected to join the Financial Awareness Network to meet the credit union eligibility requirements (for a one-time $10 fee). There are hundreds of organizations that qualify for membership, so you can scan the list to see if you are an employee or member of any of them, and if not, just select Financial Awareness Network.

As part of the online application, I selected to make my initial deposit to the CD with an electronic transfer from my checking account. The maximum initial deposit from an external account is $15,000, so apparently the only way get close to the maximum of $100,000 is to make additional deposits later, which is what I planned to do anyway.

I'm grateful to the Boglehead forum member who asked the question about saving for a 3-5 year period, as I may not have learned about this CD otherwise!

29 comments:

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    1. Federal Credit Unions are NCUA insured, which basically is the same as FDIC insurance for banks in terms of limits. You'll see at the bottom of their web site home page the NCUA logo, and the statement that they are Federally insured by NCUA.

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  3. Wondering how you did this since the credit union requires a FAN membership number and the FAN application is by mail. Or am I missing something?

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    1. I wondered the same thing but found that you can join FAN as part of the online membership process for NWFCU.

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    2. After selecting FAN in the online application, you will be presented with a drop-down menu. One of the choices is "Joining FAN", which is what you select. No FAN number is required.

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  5. Did anyone determine whether account holders will earn interest on amounts above $100,000? i.e. Should we fund with a maximum of $91k or are we good to do the full $100k?

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    1. I've never owned a CD before, but NWFCU told me that you can have the dividends transferred to your savings (which you must open as well), thus keeping the balance at or under the 100K in the CD.

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    2. The replies in the Bogleheads thread I started on this indicate that people are being told that then can deposit $100K, and still earn interest. I have sent them an email asking for a definitive answer. I helped a friend, and he deposited $100K, so it better be true one way or another.

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    3. I received an email reply from NWFCU on this, and the answer is yes, the $100K limit is only for the deposits, and the CD continues to earn the 3.04% APY if a total of $100K of deposits are made.

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  6. Can I deposit $100K now and keep adding $10K each month and still earn the 3% rate on the total amount?

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    1. No, I think $100k is the limit. You could deposit $10k now, then keep adding $10k/mo until you reach the limit of $100k.

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    2. Thank you. What if my earned interest gets back to the CD each month and total exceeds $100k?

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    3. I am waiting for a definitive answer about this if proceeds are reinvested in the CD. Hard for me to imagine that interest would not be earned in this case, but we'll find out. Having interest deposited to savings wouldn't be bad, but would lower the APY from 3.04% to the basic rate of 3.0%

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    4. The email NWFCU sent in reply to my questions said that yes, you will earn 3.04% APY on all deposits, regardless of when they are made, and that you will continue to earn the 3.04% APY if you reach the max of $100K of deposits. Since you wouldn't earn 3.04% APY if the interest went to savings, you must be able to have the interest reinvested in the CD, even if the balance reaches $100K.

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  7. The disclosure document does say that the CD can be held in an IRA. There are fill-in pdf forms for opening Traditional and Roth IRA's, as well as forms to initiate direct transfers from Traditional and Roth IRA's held elsewhere. There is also a secure email system that you can sign up for to email the forms. Now, what I don't know for certain, because I haven't done it yet, is whether the special deal is locked in during the time required for the transfer.

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    1. We are seeing conflicting answers about this in the BH thread, but I would not count on a rate lock unless you get it in writing. My best guess now is that they will not lock the rate, in which case I would not do an IRA transfer--too much risk that the rate will drop. Perhaps you could do a $10K transfer, and then if you get the rate, do an additional transfer to max it out. For anyone who wants to try it, the IRA forms are easy to find by searching on IRA on their website.

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  8. If I choose to add to the CD at a later date, would the second deposit start a fresh 3 year cycle? Or would it end at the original maturity date?

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    1. Appears I may be too late? Not seeing this promotional rate on the application form under the certificates tab

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    2. Argh, :15 minutes too late. CD no longer offered as of 7pm Eastern.

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    3. Sorry you didn't get under the wire, shawn. For others who did, the answer to your question is that additional deposits do not extend the maturity of the CD.

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  9. There is no 3% on the website. can you please point me to the site with 3%
    https://www.nwfcu.org/Certificate_Rates/
    thanks. currently CCU has 4-5% on checking account

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    1. This promo rate has expired. Shawn's thread (above you) answered your question.

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    2. All things considered: Setting this up was tedious, now that it is set up the online banking registration did not work. I tried 4 times, and also tried the password I had used for receiving emails from them. I have called, and they have difficulties answering their phones. I leave a call back number, and now after 24 hours, and again 4 hours, no call back. I also sent an email to them 24 hours ago, and another to a person at the CU. It was somewhat of a poor way to spend time... in comparison to the experience I expected.

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    3. There are seven pages of replies about this CD deal in the Boglheads forum thread I started about it. A number of people had problems, as mentioned by Michael. For some it was easy, some had issues and persevered, and some just gave up.

      Based on people's experiences, I edited my Bogleheads post to include a bunch of tips to facilitate the process. Of course now that the deal is over, it's irrelevant.

      I personally had no problems, and I successfully opened or helped to open four new accounts at NWFCU. I think a lot of it has to do with how comfortable and experienced you are opening accounts at credit unions. For many, it's just not worth it.

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  10. A belated thank you for publicizing this Kevin - I snagged on. What a great CD!

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